Arrowroot Acquisition Corp. (NASDAQ:ARRW) has entered into a definitive agreement to combine with AI technology firm iLearningEngines at an enterprise value of $1.4 billion, or 3.3x its 2023E.

The Bethesda, Maryland-based company provides AI-based tools to automate business operations and improve efficiencies in internal programs for a variety of industries.

The combined company is expected to trade on the Nasdaq under the symbol “AILE” once the deal is completed.

Transaction Overview

Arrowroot has about $43 million in its current trust after seeing 84.5% of shares redeemed in a March extension vote, but it may now automatically extend its deadline in one-month increments up to February 4, 2024.

It plans to raise enough other committed capital through a private convertible offering and other facilities to surpass the transaction’s $100 million minimum cash condition. iLearningEngines aims to use proceeds primarily for M&A and organic growth.

The parties have not yet filed their merger documents or an investor presentation, but Arrowroot’s profile page will be updated once additional terms are available.

Quick Takes: There has been some thought that 2023 could be the year of AI in the same way that 2021 was the year of the EV.

One thing separating these two emerging technologies, however, is how far companies were from deploying it. Many of the EV companies that zoomed into the public markets via SPACs in recent years still had factories to build, designs to finalize and sales contracts to negotiate.

On the AI side, the public zeitgeist has largely been animated this year by the discovery of just how much work AI was already doing. iLearningEnginges is very much an example of that.

Having raised relatively little outside funding to date – just $11.9 million, according to Pitchbook – the company has grown to $309 million in revenue in 2022E and positive adjusted EBITDA over the past three years. The parties have not yet released financials on the company so those adjustments could be significant.

Nonetheless, some of its volume numbers would seem to speak for themselves. With about 1,000 clients and 3.2 million users, a fair amount of businesses are finding utility in iLearningEngine’s tools.

The company’s services have largely been built to be customizable to a variety of tasks. Part of its core is a knowledge cloud that ingests all of the client’s enterprise intellectual property and content to provide suggestions for further developments as well as automatically building models for both internal and external chatbots.

With this at its center, iLearningEngines clients can more easily set up internal training programs and find opportunities for automating certain business functions. With the knowledge cloud crunching this information, iLearningEngines’ platform can also drive more data insights, providing answers to questions the client may not have thought to ask.

Among healthcare clients, iLearningEngines estimates that companies have been able to drive 40% cost reductions from automating certain processes and have improved the speed of certain services by 80%. In education, its services have been able to automate about 60% of grading and assessment efforts and improve test scores by 25% for institutions that have fully bought in.

The average person is perhaps most likely to have encountered iLearningEngines’ programs on the retail side via automated customer service teams. But the company also believes it can drive 30% cost savings in reducing employee churn from burnout and re-skilling workers faster.

Its applications for the oil and gas industry have primarily focused on gaining safety improvements, but it has unveiled a complex suite of services specifically designed for insurance. It stands to reason that AI automation is an apt fit for that industry which requires copious paperwork and fast calculations for risk models.

And, while legacy insurance players work to keep up with fast-moving digital insurers like Lemonade (NYSE:LMND), iLeaningEngines is likely to continue to find work in supplying functions that these companies have not yet been able to develop internally.

SPACs have already combined with a number of companies with internal AI technology guiding products in some of these sectors. iLearningEngines’ closest de-SPAC peer on the retail side would likely be LiveVox (NASDAQ:LVOX), which similarly runs automated customer engagement chats for clients’ websites.

But, a wave of companies also went public in the biotech space using AI as research engines to power genomics research and more quickly arrive at the compounds of chemistries that might present a breakthrough in particular trials.

Like LiveVox, however, these companies have largely not been warmly embraced by the market thus far, in part due to inflation squeezing their growth projections and their burn rates remaining high.

iLearningEngines could therefore be the first exception from this crop as it is more highly diversified than its predecessors and has scaled with at least some recent profitability. But, investors are sure to be interested in a closer look under the hood to make that determination.

ADVISORS

• iLearningEngines Advisors:
  • Cooley LLC is serving as legal counsel
• Arrowroot Advisors:
  • Goodwin Procter LLP is serving as legal counsel